2017 operationa data: slight beat on marketing and a strong 4Q17 in volume
Sinopec released its 2017 production data after the market close on 19 January,which was in-line with the company's target and our estimates. The positivesurprise came in refined product sales, which beat by 1.6% with 4Q17 salesgrowing 3.2% yoy, reflecting that the marketing price war may now be over.
Refining and chemica production missed slightly for FY17, though 4Q17 sawstrong growth, particularly in ethylene, and improvement to refining run rates.
Natura gas production was 3.7% higher than SNP's initia target to offset the missin crude production. We reiterate Buy Sinopec-H ahead of strong FY17 resultswith target price of HKD7.86.
E&P: domestic crude production yoy growth turned positive in 2H
The upstream oi and gas segment recorded production of 446mmboe in 2017（+3.4% yoy）， versus DBe of 447mmboe and initia target of 441mmboe made atthe beginning of last year. We highlight two things. 1） Domestic crude productionregistered 1.7% yoy decline for ful year, but production rose +1.5% yoy in 4Q17vs +0.1%/ -5% yoy in 3Q17/ 1H17, respectively. Sinopec has clearly acceleratedcrude production with rising oi price, and accordingly the upstream may losesignificantly less money. We expect E&P segment to lose RMB30bn in 2017versus RMB46bn in 2016. Given that its upstream oi segment won't break evenunti Brent reaches USD70/bb and sluggish capex in previous years, we expectcrude oi production to be roughly flat in 2018. 2） Natura gas production grewby 19.1% yoy in 2017, which was in-line with DBe but 3.7% above initia target.4Q17 volumes grew only 14% yoy, which was actually slower than its 9M17 of20%. We believe SNP wil continue to place a strong emphasis on gas with theconstruction of its Xinyue gas pipeline phase 2 and gas storage facilities in Henan.
We expect gas production to continue growing double digits in 2018 as a resultof its success in Fuling shale gas.
Refining & Marketing: retai sales better than our estimate
Refining recorded tota throughput of 239mmt in 2017 （+1.3% yoy） versus DBe of236mmt and initia target of 240mmt made at the beginning of 2017. The actualprocessing volume was 1.1% ahead of our forecast with teapots utilization beingcapped in 4Q17. 4Q17 GRM also grew by 2.6% QoQ to average USD12.28/bbl.
Gasoline/Kerosene output registered growth of 1.2%/5.5% yoy, respectively, whilediese dropped by 0.9% yoy. In 4Q17, kerosene saw the fastest growth of 3.3%yoy while the rest were flattish. Tota domestic sales of refined oi products formarketing arrived at 178mmt, up 2.9% yoy and 1.6% above DBe and target. Thebeat is mainly due to better-than-expected retai sales volume - 2.3% above DBe - and the "price war" have largely subsided in 4Q17. Direct sales and distributionregistered 6.9%/6.6% yoy growth in 2017/4Q17.
Chemical: ethylene output +5% yoy on 10yr high spread
The chemica segment recorded ethylene production of 11,610k tons in 2017（+5.0% yoy）， versus DBe of 11,659k tons and initia target of 11,660k tons madeat the beginning of last year. The ethylene spread reached 10-year high in 4Q17and remained elevated in 1Q18; therefore, we expect ethylene production to seedecent growth in 2018. Synthetic resins output grew by 4.8% yoy but syntheticfibers/rubbers fel a bit in 2017. In addition, the PE spread remained high atUSD749/t for the first three weeks in January versus USD746/t in December lastyear, reflecting chemica spreads to stay strong despite oi price uplift.